Daniel Tenengauzer, head of Global Emerging Markets Fixed Income Strategy
First the feast, then the scare
In this Spotlight, we revisit our annual theme 4 on risk appetite towards emerging markets for 2010. The way we initially saw the global risk backdrop for emerging markets was in two phases: first, the market feast in the first six months of next year (Thanksgiving), which may then be followed by some type of market scare (Halloween).
Strong outlook for inflows into EM
Having met with numerous institutional investors as part of the marketing of our key themes for 2010, there is strong anecdotal evidence that investors are looking at emerging markets as a place to add on risk in the period ahead. This reaffirms our view that inflows into emerging markets are likely to edge up markedly this year. This has been so far an auspicious start to the year for inflows into EM funds.
Risk of belt tightening and indigestion after mid-year
We believe there are potential risks of a shock to appetite toward EM after mid-year, which may create a more challenging market. The main source of this risk may be signs that the ECB is readying itself to tighten monetary policy. The ECB is likely to be the first major central bank to raise rates, probably in September. Another source of risk may be the correction in investor positioning, after having worked up an overstretched appetite in the context of the bullish first half of the year.
A bullish bias for now
Overall we remain bullish about the global risk appetite backdrop towards emerging markets in the first part of the year, mainly reflecting strong prospects for inflows into EM, improvement in EM fundamentals, and a bias in favour of accommodative policy stances in a number of EM.
